Full name: Vu Thi Lan Huong

ID code: 19A7510104/ K19- ATCD

Topic: Forex market in Vietnam. Regulations. Participants. Recent movements.

In line with the broader economic reform process, Vietnam’s exchange rate regime has
evolved from a system of multiple exchange rates to a single announced fixed rate, then
to the current system of a narrow adjustable band around the official rate, which is itself
set on a daily basis and is meant to reflect the interaction of market forces (Nguyen Tran
Phuc and Nguyen Duc Tho, 2009). The country’s exchange rate policy is implemented
and administered by its central bank, the State Bank of Vietnam (SBV). The focus of
policy in this area has been the nominal, bilateral VND/USD exchange rate. There are
two forex trading floors in which the first established in 1991, one in Ho Chi Minh City,
the most important financial centre in the country) and the other in Hanoi (the capital).

As per Vietnam law, any transaction that is related to direct or indirect investment
transaction by a foreign investor must be implemented by an investment capital account
opened in a licensed bank which is permitted to trade and supply foreign exchange.

Foreign direct invested enterprise

FDI in Vietnam means the transfer of capital for investment and participation to manage
investment activities in Vietnam as defined by Circular 19/2014/TT-NHNN. This
includes residents that are entities and receive direct foreign investment, non-residents
involved in a business cooperation agreement (BCC), and non-residents who are foreign
investors of FDI entities.

FDI enterprises are required to open a Direct Investment Capital Account, which is a
current account in either a foreign currency or the local Vietnamese Dong. It is typically
in the name of the FDI entity, the foreign investor in a business cooperation contract or
private partnership contract (PPP).
DICA requirements

As per Circular 6, if a transaction of share transfer in an FDI entity is between a non-

resident and resident, the transfer of funds must be done through a DICA. The same
applies to fund transfers for investment project transfers.

The new regulations also allow for further flexibility for foreign investors that want to
transfer funds using a DICA. The regulations now allow them to remit funds for pre-
establishment costs before obtaining the IRC. This can be done directly from the foreign
country into Vietnam to contractors or third parties. In addition, payments for capital
transfer between a foreign seller and foreign purchaser as well as between a local seller
and local purchaser do no need to be done via a DICA.

Indirect investment capital accounts

Foreign invested enterprises that have ownership of less than 51 percent due to
an M&A transaction or are registered with a stock exchange must close their DICA if
they have one. However, if the DICA is being used for the payment of loans it can
continue to operate

Once they close their DICA, non-resident foreign investors are required to open an
Indirect Investment Capital Account to continue investment activities in Vietnam. IICAs
are used for indirect investments such as purchasing shares or sale of bonds in Vietnam.
Profits that are obtained from indirect investment activities must also be remitted to the
foreign investor using it.

Foreign indirect investment means that foreign investors make an investment into
Vietnam by buying securities, capital and purchase of shares, and investment funds
without direct participation in the management of investment activities. Transaction
related to indirect investments must be done through an IICA at a licensed bank in
Vietnamese Dong.

There are some main parties which involved in the forex market including:

- Central bank (SBV): control the fluctuations of Vietnam forex market under the
regulations, particularly by passing the comon laws
- Small business
- Commercial banks
- Retailers
- FX borkers

Some leading factors that influence the variations and fluctuations on the exchange rate
in Vietnam:

- Inflation: Vietnam evidence high inflation relative to U.S Curren inflation: The
inflation rate for consumer prices in Vietnam moved over the past 23 years (1996-
2019) between -1.7% and 23.1%. For 2019, an inflation rate of 2.8% was
caculated
- Risks of illiquidity (in particular, excess demand for US dollars)
- Non-transparency and inaccurate price signals
- The dong interest rate has become lower than the dollar interest rate, the interest
rate gap is very small, not big enough to kick off the speculation movement of
banks. The foreign currency supply is now plentiful thanks to the high trade
surplus of $7 billion in the first 10 months and the 7.4 percent increase in
disbursed FDI capital to $16.2 billion.

In conlusion, the State Bank of Vietnam (SBV) takes a very important role as the
regulatory body for forex trading in the country. It mainly aims to maintain the
financial stability of the economy, supervise money management and monetary
policies, provide banking facilities and banknotes, and organize government bond
auctions.